Is it possible to have a soft landing instead of a bubble burst in the self storage industry?
This question presupposes that there is a bubble forming in self storage. That’s an easy assumption to draw if you’re counting the number of new facilities going up in the market: over 125 in Dallas, 70 plus in Houston. Almost every large market has a similar number.
So yes, in many parts of the country there are a lot of facilities under construction.
Is that a bubble?
It could be. I know there are certain markets now that Jerrigan Capital won’t lend in. It was surprising to me that they would write off entire markets. But they’re way smarter than I am, so perhaps you can follow their lead to determine which markets are good one.
Here is what I do know, or think I know. As far as I can see, self storage is still a submarket phenomenon. I’ve been looking hard for disrupters to this too.
I find it interesting how many facilities are going up in Houston. But I am much more concerned with how many facilities are going up in the market area of a project I’m looking at in Houston. The number in a submarket is relevant, the total number in a city is interesting.
No one is going to drive from The Woodlands (north central part of the Houston market) to the area around Houston Hobby Airport (southeast Houston) to rent from my new self storage facility because the doors are so pretty.
People may drive to work, to live, or even to shop (go retailing) but they are not going to drive to lease self storage.
People are going to rent storage where they live or work. Period.
So let’s go back to the original question and look at the two parts, bubble and soft landing.
Is there a bubble?
The only way to answer that is by looking at the sub-market you’re interested in. Is it being overbuilt (i.e. more supply going up than the potential deman) in that particular sub-market?
If the answer is yes to that question there is, or could be a bubble. The large number of reported facilities in Houston or Dallas indicates that there are now higher odds that any given submarket could be overbuilt or approaching it.
It is a red flag for sure, but should not be the only indicator you go by. The SSA’s city list [http://www.selfstorage.org/Products-Services/Research-Data] indicating equalilubrum, overbuilt, or underbuilt, is an indicator, but not the end all and be all. Use it with caution, and dig deeper.
You can do a preliminary analysis yourself for a sub-market. I do. I don’t trust the accuracy of mine enough to make long term decisions based off them. I do them to get an initial feel for an area.
All I do is get a copy of the demographics for the location, usually from the realtor. If they don’t have them, I go to Esri and get a copy.
Then I go on Google and plot out how many facilities there are in the submarket. I know this isn’t perfect, but it’s usually close to accurate. Then I guess. I guess how big they are. If I don’t know (I usually don’t) I will look at them in Google Earth. Then guess.
Finally, I look at the average number of square feet of self storage per person in that city or state. Both the SSA and the ISS (Self storage Association and Inside Self Storage) have this data. The Self Storage Almanac is a good resource. This will give me a feel if my submarket has a high or low number square feet of storage per person.
This just gives me a feel. I always will get a feasibility report to get the true picture of the submarket if my own initial analysis looks good. I am also never afraid to update a feasibility report on one of my facilities if I’m considering another phase of construction.
This leads me into the last part of the question, is a “soft landing” possible?
I say here a resounding, “Yes!” Never before has the small investor had such a level playing field with the bigger players as we do today. We have the exact same data and information at our fingertips that they do.
All we have to do is to use it. Much of why I do all I do around coaching other investors instead of only focusing on my own self storage company is for this reason. I know how great the business is and I want the smaller investor to approach it intelligently so the playing field is level.
That means, first and foremost, get a feasibility report before you purchase, build, or expand anything.
That will tell you what is in the pipeline. You will know the barrier of entry so you can estimable your odds of competitors coming in behind you.
If we, as an industry, use the information and data that’s available, there is no reason we should overbuild any given sub-market. It is in no one’s interest (other that the manufacturers and erectors) to do that.
There is absolutely no reason we can’t land softly. I intend on doing just that and we can as an industry. All we have to do is to use the not so hard discipline of research and feasibility reports to not overbuild in submarket by submarket.
These feasibility reports are very accurate because self storage is such a submarket phenomenon. Remember, people rent where they live or work. Therefore, these reports can be extremely accurate. More accurate than any other type of real estate product. (Another reason I love self storage so much).
So use discipline, don’t just build.
Use the data and/or get feasibility reports so you know the exact health of any given submarket, then act accordingly. If there is unmet demand, provide it. If there is equalilumerm or more product than demand, wait (that won’t last forever).
It’s that simple. This is how, as an industry, we have a soft landing.
Let’s do it and show those apartment guys how it’s done
